Developmental potentials of cells are tightly controlled at multiple levels. The embryonic Drosophila airway tree is roughly subdivided into two types of cells with distinct developmental potentials: a proximally located group of multipotent adult precursor cells (P-fate) and a distally located population of more differentiated cells (D-fate). We show that the GATA-family transcription factor (TF) Grain promotes the P-fate and the POU-homeobox TF Ventral veinless (Vvl/Drifter/U-turned) stimulates the D-fate. Hedgehog and receptor tyrosine kinase (RTK) signaling cooperate with Vvl to drive the D-fate at the expense of the P-fate while negative regulators of either of these signaling pathways ensure P-fate specification. Local concentrations of Decapentaplegic/BMP, Wingless/Wnt, and Hedgehog signals differentially regulate the expression of D-factors and P-factors to transform an equipotent primordial field into a concentric pattern of radially different morphogenetic potentials, which gradually gives rise to the distal-proximal organization of distinct cell types in the mature airway.